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When should governments intervene in private sector mergers?

Summary

Commercial companies are owned by their shareholders.

They are free to buy and sell them.

When are governments entitled to intervene in takeover situations?

The Pfizer bid for AstraZeneca provides a case study.

18 May 2014

In recent weeks we have seen significant media interest in the possible takeover of the pharmaceuticals firm AstraZeneca plc by another, Pfizer Inc. While many claim to believe in free markets, they are often surprisingly keen to interfere in their operation.

I joined the Conservative Party in 1983 because I was convinced by the political vision of Sir Keith Joseph and Margaret Thatcher. Equally influential were the television series and book “Free to Choose” by Milton Friedman. Since then, although I do not claim the sole credit, we have seen the greatest poverty reduction in human history as the People’s Republic of China embraced capitalism in practice while continuing to espouse Marxism Leninism in theory. Many countries around the world have followed suit, and have succeeded in direct proportion to their adoption of free-market principles, private ownership, and the rule of law.

The success of the right, originally led by Ronald Reagan and Margaret Thatcher, has been so great that even the British Labour Party eventually abandoned its shibboleth of Clause 4. Nevertheless I believe that in reality socialists still don’t understand that free-market capitalism makes everybody richer while socialism makes everybody poorer. However, what I find dispiriting is when intelligent Conservatives feel the need to kowtow to populist and socialist demagoguery. We have seen a lot of that recently.

The Pfizer bid for AstraZeneca

My wife and I, both directly and through small self-invested pension schemes, own shares in both Pfizer and AstraZeneca. (My calculator runs out of zeroes after the decimal point when I try to work out how small a fraction of each company we own.) We hold these shares because we believe that the future cash flows we will receive from each company, (dividends plus our eventual sale price) discounted to a present value using our personal discount rates, exceed the current market price. Otherwise we would sell the shares and buy something else.

I find it moderately interesting that both companies run businesses that seek to make people healthier. Indeed I have never purchased shares in a tobacco company because I did not want to make money by encouraging foolish people to damage their health. However if my employees (the directors of these companies) persuaded me that closing down all of their research facilities and factories, and terminating all of their employees, to reinvest in making plastic seaside buckets would make more money, I would vote in favour of their proceeding with the new strategy.

Several decades ago when I first began learning economics, I absorbed the fundamental point that the purpose of a private sector business operating company is to make money for its shareholders; everything that it does is purely a means towards that end. Means should never be confused with ends.

The national interest

We citizens of the United Kingdom do have a collective national interest, since many goods that we desire (known in economics as “public goods”) can only be provided collectively, not individually. A simple example is external defence. We have a vital national interest in ensuring that our country can defend itself, which is why our government quite properly has the right to veto foreigners (if we disapprove of them) buying nationally important armaments manufacturers.

However, we need to be vigilant to avoid scope creep when defining the British national interest. Otherwise we will find ourselves like the French, concluding that control over our yoghurt industry is of national importance, simply because some employees in the yoghurt industry fear termination if their company is acquired.

It makes sense for the UK to encourage major multinationals to base themselves here. That creates all kinds of jobs in head office functions and work for service providers to head offices such as accounting firms and law firms. Over the last few years with the introduction of a territorial tax system and other measures such as the “patent box” the UK has made itself a much more attractive place for multinational companies. These changes will even boost our tax revenue in the long run. Such changes are the reasons why Pfizer wants to leave the USA and come here. We should celebrate that.

It is extremely desirable for the UK to be a base for high-quality scientific research in all industries, including life sciences. That has been threatened in the past by the activities of people such as animal rights terrorists and I am pleased that governments have taken appropriate action. If we want more scientific research in Britain we need to continue with policies such as making it easier for skilled foreigners to immigrate to Britain, and policies that make it cheaper to employ people here (such as reducing employer’s National Insurance) rather than employing people overseas. Our strategy of making NHS data available for scientific research, including that from the UK Biobank in which I am a “guinea pig”, are also very worthwhile.

The most important policy of all in my view is for the UK to generously fund its best scientific universities such as Cambridge (I declare an interest being an alumnus) so that we have the best possible output of highly skilled graduates.

Conversely seeking to “strong arm” assurances regarding the location of future research or production facilities out of one private sector pharmaceuticals company which wishes to acquire another is not the way to go. It is simply irrelevant. Indeed, to the extent that it makes our country less business friendly, it is counterproductive.

Readers' comments

There were a number of comments received from readers. While I expected that self-described left wing readers would want the Government to intervene in the bid to protect jobs or research, what I found slightly dismaying was the number of apparently right wing readers who wish to do the same thing. I conclude that more effort needs to be put into helping the public to understand why free market capitalism is the most sensible way to run an economy, and that this requires governments to meddle only where strictly necessary.

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